Public Bill Committee

[Mr. Eric Illsley in the Chair]

Clause 5

Code of practice

Amendment proposed [4 November]: No. 81, in clause 5, page 3, line 35, at end insert
(ca) how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached,.[Mr. Hoban.]

Question again proposed, That the amendment be made.

Eric Illsley: I remind the Committee that with this we are taking the following: Government amendment No. 89.
Amendment No. 80, in clause 5, page 4, line 3, leave out have regard to the code and insert
comply with the code or publish an explanation of why they were unable to comply with the code in good time after their actions,.
Clause 5 stand part
Amendment No. 82, in clause 6, page 4, line 11, leave out and.
Amendment No. 83, in clause 6, page 4, line 14, at end insert , and
(d) those persons whom it considers to have relevant knowledge of those matters..
Amendment No. 85, in clause 6, page 4, line 17, at end insert
only after complying with the requirements set out in subsection (1)..
Amendment No. 84, in clause 6, page 4, line 18, at end add
(5) The code shall not come into force unless it has been approved by a resolution of each House of Parliament..
Clause 6 stand part.

Mark Hoban: I welcome you to the Chair, Mr. Illsley, for todays proceedings.
We had quite a full debate on this group on Tuesday afternoon and I want to reflect a little on the Ministers response to it. Before I do so, I should like to refer to the comments that my hon. Friend the Member for Gosport made about who should pull the trigger. He made them in the context of the debate about the code and we will pick up on that in clause 7. My hon. Friend and I share the same viewpoint on this. For a variety of reasons we believe that the best body to pull the trigger is not the Financial Services Authority but the Bank of England.
My hon. Friend gave a clear elucidation of those reasons on Tuesday. If we concentrate on the efficiency of the regulatory system, there is a danger that we forget about its effectiveness. The responsibilities of the tripartite authorities are so clearly delineated in each others minds that sometimes there is no overlap or any form of check or scrutiny or engagement in other aspects of their arrangements. That is why giving the Bank of England the power to pull the trigger will give it a much greater role in the supervision of the banking system.
We need to get the balance right. We do not want to have two regulators, but we need to ensure that there is an effective check and there is no risk of regulatory forbearance by one regulator. My partys policy is that the Bank of England should pull the trigger but, as the Minister knows, in the interests of passing the Bill speedily, my right hon. Friend the Member for Witney (Mr. Cameron) indicated that we would not be pursuing this matter now. We will leave this one for another time. It is very much on our agenda to look at this.
I want to go back to the Ministers remarks on Tuesday afternoon and to focus on two points. The first is about flexibility. We appreciate the need for flexibility in the code and the way in which the powers are operated. The Minister talked about flexibility in the context of making a statement on the use of powers and my amendment on comply or explain. I understand the point he makes, but there is a risk attached to flexibility that we need to bear in mind. The code is being put out to consultation today and will be redrafted. If it is too vague or opaque, or the need to comply with it is too lax, it will undermine confidence in the way in which it is meant to circumscribe the exercise of powers in the Bill. I will come back to the comments made by the hon. Member for South-East Cornwall about the benefits of that circumscription.
The second point is on the threshold conditions. The Minister indicated that the FSA, in the light of the Bill, will look again at the threshold conditions to ensure that the two things dovetail. When will the FSA consult on a revision of the threshold conditions? Will there be fewer conditions? I mentioned a couple of the conditions on Tuesday. Will the adequate resources condition be the key condition in the context of the Bill, and how much guidance will the FSA give on the conditions? One concern is that too much opacity on how the conditions can be met or, indeed, breached, will undermine confidence in the use of powers in the Bill.
I should like to go back to the central purpose of having the code in the Bill and why the code is important. The Bill includes some quite invasive powers: it gives the tripartite authorities powers to interfere with the rights that creditors and investors would normally enjoy. For example, it gives the tripartite authorities the right to take control of the bank and to transfer part of its assets into a bridge bank. The code is meant to provide confidence to creditors and investors about how the powers will be exercised. Increased uncertainty about that means that there is high risk in the eyes of investors and creditors. Higher risk means an increase in the cost of capital, which will make it harder for banks to raise capital, which will have an impact on the wider economy. If the cost of capital of a bank increases, so will the cost of the loans it makes to households and families.
I believe that the Government recognise that, which is why they have accepted that it is important that the code sets out the limitations on the exercise of powers in the Bill. However, to give confidence to the sector, the code needs to be explicit about the circumstances in which, and when, the powers will be exercised. The Government must therefore produce a much more detailed code if they are to allay any fears about the use of the powers. They need to provide clear guidance to the tripartite authorities rather than produce a rewrite of the explanatory notes, and to set out, in the context of clauses 10, 11 and 12, the hierarchy of the stabilisation options, and what is the preferred option.
Not only the code but the threshold conditions need to be more specific to avoid the sense that they can be used in an arbitrary fashion. The Government will argue that they need flexibility; that an overly restrictive code will constrain the freedom of action. However, if the use of invasive powers in the Bill is perceived to be unconstrained, markets will make their own judgments on whether they should invest in British banks. If the code as redrafted does not provide significantly greater detail on how and when the powers will be used, there will be demand for the constraints to be in the Bill rather than the code.
The Government need to reflect on the tension between flexibility and reassurance. At the moment, the code errs on the side of flexibility. If that continues, the cost of capital will rise, and families will pay the price through higher interest rates. Moving forward, the Government need to think carefully about how the code should be redrafted to give confidence to banks and their investors and creditors. Certainly, conversations that I have had in the past few days with external parties suggest that the code as currently drafted does not do the job that people expected it to do.

Ian Pearson: It is a pleasure to welcome you to the Chair for this sitting, Mr. Illsley. I spoke at some length on the proposed amendments to clauses 5 and 6 on Tuesday afternoon, and I do not intend to do so today.
I should like to say two things in response to the hon. Gentleman, the first of which is on his point about the FSA and the need to explain the situation. The FSA is looking at the guidance on threshold conditions, not the conditions themselves, and plans to consult on it in December. However, as I made clear earlier, I can confirm that adequate resources and management suitability are key conditions for assessment of the trigger.
There are always decisions about what to put in primary legislation and what is more naturally secondary legislation or required in codes of practice. Those decisions are fairly straightforward in many instances, but in others they are matters of judgment, with fine distinctions. We always have debates about those issues.
I welcome the hon. Gentlemans general support for the Bill and I note his comments on the code. As he says, we are consulting on it, starting today, and also consulting on the secondary legislation. We have been working closely with the expert liaison group and others to ensure that we get the details of the secondary legislation right. I do not think that there are any differences on intention or principle other than on who exercises the trigger. There is genuine willingness on both sides of the Committee to have legislation and a code of practice that does the job that we all want it to do. With those brief comments, I hope that we can move on.

Mark Hoban: I welcome the Ministers remarks. It will be important for the Bills progress through the other place, where their lordships will be looking carefully at the revised code and how it interacts with the powers, to get the balance right. My main concern is that the balance between the constraints, which the code imposes on the exercise of powers, is not right. I recognise the tension between primary and secondary legislation and the code. I, and others, would be more comfortable, if the code was beefed up, but people will make their views known clearly through the consultation process. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 89, in clause 5, page 3, line 39, leave out paragraph (f).[Ian Pearson]

Clause 5, as amended, ordered to stand part of the Bill.

Clause 6 ordered to stand part of the Bill.

Clause 7

General conditions

Colin Breed: I beg to move amendment No. 75, in clause 7, page 4, line 27, leave out not reasonably likely and insert highly unlikely.
I, too, welcome you to the Chair, Mr. Illsley. The amendment is also in the name of the hon. Member for Fareham, who will no doubt want to say a few words. The clause, which covers general conditions, is another important part of the Bill. The amendment is in tune with some of the previous amendments discussed, which concern how and when the powers, and the stabilisation powers in particular, are used, and their effect on the enterprise that they are used upon. On the face of it, the amendment may seem semantic, in that we are seeking to delete the words not reasonably likely and replace them with highly unlikely. In the Bill, we are attempting to consider not just current conditions but conditions in the future when this legislation may be used in different circumstances. Hopefully, it will not be used in a general sense, but in the specific case of a particular banking operation. The amendment refers to the timing of the use of such powers, which is crucial.
Our proposed regime should be invoked only when it is clear that all other possibilities for retrieving the situation in which the bank finds itself have been properly explored. Moreover, the board and the advisers must have made every effort to prevent the failure and have been given the necessary period of time to pursue such opportunities. In fact, everything possible must have been done and must have failed before the regime can be invoked. In such a situation, it is not just reasonably likely but highly unlikely that they will meet those threshold conditions.
As I said earlier, such a measure is all about timing. If at all possible, we should try to maintain the integrity of the whole business. We should consider the value of that business and the opportunity for it to continue. We should not take precipitate action that would jeopardise that possibility.
Leaving action too late could jeopardise the possibilities for protecting the depositors, which is the principal thrust of the Bill. None the less, exercising those powers too early could jeopardise the interests of other stakeholders in the business, so the timing is critical. Just as we discussed the opportunity of exercising the powers in a flexible way, so, too, the authorities will want as much flexibility as possible in determining exactly when they introduce the powers.
The amendment is designed to raise the bar to protect, to a certain extent, the bank and its directors in their efforts to maintain the enterprise. We do not want action to be taken too early in the interests of depositors without necessarily taking into account the interests of other stakeholders. We are talking about pre-solvency situations. The enterprise at that stage may be solvent, but it may not reach the threshold conditions. There is a period of time in which there are opportunities to save it.
The Government should seriously consider the amendment, particularly in light of the remarks made by the hon. Member for Fareham during our debate on the last clause. The amendment will provide some measure of confidence to those who are being asked to invest substantial sums in the banks. It is likely that part of any operation to try to meet the threshold conditions will inevitably involve recapitalisation or the raising of additional capital. Going out to seek fresh capital when there is a possibility that the trigger will be pulled because it is not reasonably likely that the bank will meet the threshold conditions is a whole lot different from going cap in hand with a clear indication that it is highly unlikely that the trigger will be pulled. To a certain extent, it will give a view on whether a capital-raising exercise is a possibility. It may even jeopardise the capital-raising exercise, thus defeating the whole purpose of trying to maintain the entity as a whole.
Although, it may seem merely semantic to change the words, they are highly significant. If we are moving the bar, or having the bar set at such a low level as not reasonably likely, it will affect the efforts of any bank under threat of not being able to meet its threshold conditions to retrieve the situation. An awful lot of things may not be reasonably likely at any one stage, but that does not mean that they will not happen. Efforts can be made and negotiations can be undertaken, but once they have been completed and it becomes clear that any rescue measure seems to be beyond redemption, in that sense, it then, of course, becomes highly unlikely. At that stage, it is inevitable that the threshold conditions will not be met, and the powers can be exercised.
As I have said, we should seriously consider those points because, as we noted when we discussed the last set of amendments, confidence in the marketplace, the cost of capital and the ability to maintain a competitive operation within the general marketplace should not be jeopardised. I have referred to the measure being just for depositors and they are, of course, an important part of the legislation, but so too are other aspects of the whole banking business. That includes those who provide the capital for banks and the way in which banks generally operate in the competitive marketplace. With those factors in the mix, we should be careful before exercising the powers and we should ensure that the conditions to be pursued are set at an appropriate level. The bar should not be set too low. In addition, the authorities should not be brought in too early as that could even be to the jeopardy of depositorsalthough not necessarily. However, it could certainly be to the jeopardy of other stakeholders.

Mark Hoban: I do not have much to add to the comments of the hon. Member for South-East Cornwall, who highlighted the challenge posed by the wording of the Bill. It certainly seems that there is a low hurdle for the FSA to jump to trigger the powers. I shall touch on the issue of time scale, which the hon. Gentleman also mentioned. An institution might have a short-term funding problem for a week, but the position might be resolved in a month. What is the time scale for the exercise of the second condition? It is not clear how much leeway the authorities would give a business in that situation. We need to probe that matter. In part, it might be dealt with in a revised code. The hon. Gentleman and I have opted to strengthen the constraints in the Bill, but that might not be the best way, so we need some clarity about when the condition applies. The Bill states:
Condition 2 is that having regard to timing and other relevant circumstances.
Clearly timing is a key factor. I am not sure what other relevant circumstances those who drafted the Bill have in mind, but we need to understand the context in which the power would be exercised and how the regulator would define not reasonably likely in relation to that area.

Ian Pearson: Nobody wants precipitate action taken when a bank gets into difficulties, but I also hope that nobody wants the situation to be left so that it is too late to exercise stabilisation powers in a timely manner. The question is what balance needs to be struck and what judgments need to be made in that area? I fully understand the points made by the hon. Member for South-East Cornwall; he wants to probe us on the conditions and establish whether the bar is being set at the right level. We believe it is and I shall explain why.

Sally Keeble: Can my hon. Friend explain why the FSA should be the one to pull the trigger and how he wants the FSA to operate because there has been failure in the regulatory regime? I want assurances about what the exact expectations and the justifications were.

Ian Pearson: I shall happily cover that point, although the hon. Member for Gosport has raised it and we have discussed it on a number of occasions, including on Second Reading and in debate on other parts of the Bill.
Let me explain why the tests we are putting in place with these two general conditions are the right ones. The purpose of the clause is to make it absolutely clear that the authorities will notindeed, cannotuse the stabilisation powers until it is clear that a bank is failing and that voluntary or regulatory action is no longer appropriate to resolve the situation. Clause 7 has two conditions that need to be met. The first is that
the bank is failing, or is likely to fail, to satisfy the threshold conditions.
The second is that
having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions.
That point of reasonably likely has been raised by the hon. Member for South-East Cornwall with his amendment and the word timing was discussed by the hon. Member for Fareham in his contribution. On timing, it is not appropriate to set in the Bill a future time limit by which the bank has to demonstrate that it is reasonably likely that it can turn the situation around. The two conditions are to ensure that the bank is put into the special resolution regime at the right time. The cumulative effect of both conditions achieves that, as they cover a decision based on, in the first instance, the current situation of the bank regarding quantitative and qualitative conditions, and a decision about whether the future turnaround of the bank is unlikely. Those decisions are designed to ensure that the SRR powers can be exercised before the banks enter insolvency. One reason for thatas we have discussed in relation to other clausesis to preserve whatever residual value there may be in the failing bank, which is a point that the hon. Member for South-East Cornwall made strongly on Tuesday. Acting at that time increases the chance of a private sector solution or a swift resolution through a bridge bank. Given that fact, the reasonable likelihood for the second test provides the right level of assurance for stakeholders that voluntary or regulatory action will no longer work, while increasing the prospect of a successful resolution.
The use of any of the stabilisation options also includes a strong public interest test which we will debate in clause 8. As Lord Turner recently said to the Treasury Committee, things can move very quickly when a bank is in a failing situation. These are matters of judgment, but I do not think that the amendment proposed by the hon. Member for South-East Cornwall would help. We believe that the two conditions set the bar at the appropriate level.
My hon. Friend the Member for Northampton, North asked the familiar question about why the FSA should pull the trigger rather than the Bank of England. We believe that the FSA, as the regulator of firms, should be the lead authority in deciding when a bank is failing. That position was supported by respondents to the January and July consultations. Giving the trigger to another institution would be likely to lead to dual regulation of financial firms, which would be wasteful and costly. ObviouslyI have made this point on a number of occasionsat such a time the tripartite authorities would be in close contact, as they are now.
If the hon. Gentleman feels that he has to press the amendment, I will encourage the Committee to oppose it. We believe that the test of reasonable likelihoodthe two conditions in clause 7 and the public interest safeguards in clause 8sets the right level, but I appreciate the probing way in which he has pursued the amendment.

Colin Breed: I thank the Minister for his response. During the debate on the last two or three clauses, I and the hon. Member for Fareham have pointed out some potential unintended consequences of the Bill. The principal thrust of the Bill is to protect depositors; it is obviously designed to prevent runs on individual banks, and that is absolutely right in todays situation. In many respects, it is hard to disagree with the Minister, because if the principal thrust is to protect depositors we want as much flexibility as possible to enter into an arrangement to achieve that objective at the most appropriate time. The hon. Member for Fareham and I were saying that that has consequences regarding perhaps how capital can be raisedthe cost of that capitalthe wider institutional market perception of the Governments proposals and how deposit-taking institutions undertake their business. We do not know the consequences of course; we are trying to predict them. So often in this place we rush headlong into legislation, with the right intentionto achieve a speedy response to an unfortunate eventand then we live to repent, because of consequences that we had not thought of.
I shall not press the amendment because the matter has been well highlighted and ventilated in the Committee. However, I urge the Minister and the Treasury officials to think about the consequences that may unwittingly be brought about because of the fundamental desire to protect in all possible circumstances the interests of depositors. There are other interests that sometimes need to be balanced.
It is difficult to argue against what has been said on the main thrust of the Bill. We were probing the Minister, and also pointing out that there might be unintended consequences and that those might not be in the greatest interest of the UK economy and the banking network as a whole. That is the danger. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment No. 86, in clause 7, page 4, line 38, leave out subsection (6).
I want to probe how the special resolution objectives that were set out in clause 4 interact with the power to pull the trigger. We will look at the interaction between the objectives and other parts of the legislation under clauses 8 and 9.
It would be helpful to think about how the sequence of events is covered. Clause 7 gives the FSA the power to pull the trigger, which will determine whether the Bank or Treasury can exercise the stabilisation powers referred to in clause 1(4).
The Bill presents that as a linear process. The first step is either that the FSA will determine that the Bank, under clause 8, may exercise the stabilisation powers to enable it to sell a bank to a private sector purchaser or transfer it to a bridge bank, or that the Treasury will put the bank in temporary public ownership. The second step, if no financial assistance is given, is that the Bank of England will decide whether it should transfer the bank to a bridge bank or a private sector owner. The FSA, having said that the trigger can be pulled, may delegate the responsibility for what powers and options are used when no financial assistance is given. If financial assistance has been given, either the Treasury can take the bank into temporary public ownership, or the Bank can use the stabilisation powers to transfer the bank to a bridge bank or a private sector provider.
However, clause 7(6) appears to suggest that the FSA will act within a different framework of objectives from the Bank and the Treasury. The objective that will drive the FSA in that context will be the need to meet conditions 1 and 2, but it also appears that it will be driven by the objectives set out in the Financial Services and Markets Act 2000. There is not a complete match between those two sets of objectives, and after the FSA has pulled the trigger the Bank of England or the Treasury might decide not to exercise the stabilisation powers because they do not believe that to do so would be appropriate in the context of the clause 4 objectives.
The FSA might pull the trigger, and the Bank and the Treasury could say, No, we will not bother doing that because we do not think that we can achieve our objectives after you pulled the trigger. So what happens then? That might be part of the problem about the sequence of events, but I am not sure that the process is as linear as the Bill suggests. The Minister has said that the tripartite authorities will discuss resetting all those things, but will they get to the point of saying together that they would pull the trigger and take action so that the decisions are made virtually at the same time? That way, the FSA would in effect only pull the trigger if it believed that the Bank or the Treasury would use their stabilisation powers.
It is worth pointing out that subsection (4) relates to our old friend financial assistance. Given the debate we had on Tuesday about financial assistance, it would be helpful to understand what sort of financial assistance the Government envisaged in the context of the FSA being able to pull the trigger. It would be helpful if the Minister expanded on how the FSAs objectives under the Financial Services and Markets Act interact with the objectives under clause 4 and how the decision-making process will work in practice, as opposed to how it appears to work legally.

Ian Pearson: The amendment looks at the FSAs decision on whether the general conditions are met and proposes that that should be subject to the SRR objectives, and I would like to explain why I do not agree with that. A fundamental distinction needs to be made between whether the SRR should apply and what actions should be taken. Deciding whether the general conditions are met is an exercise in determining whether the SRR should apply, not what actions should be taken in pursuance of it.
The SRR objectives are relevant to what actions should be taken, and they stipulate them clearly, but they should not condition whether it is appropriate for the SRR to apply to a bank in the first place. The general conditions relate specifically to regulatory and voluntary action outside the SRR rather than action under it. That is important in providing confidence to stakeholders and the market that stabilisation powers cannot be exercised before other, non-SRR options are deemed not appropriate. That was the point made by the hon. Member for South-East Cornwall. It is right to consider what steps can be taken before the trigger is pulled and stabilisation options are considered.
The general conditions in clause 7 are linked to the threshold conditions set out in the Financial Services and Markets Act 2000. Therefore, in exercising such decisions, the FSA will be acting according to its objectives and principles under the Act. That is the point referred to by the hon. Member for Fareham, and it is absolutely right that that should be the case. In deciding whether the general conditions in clause 7 are met, the FSA would have regard to the rules and guidance in the threshold conditions section of the FSA handbook, which has regard to the statutory objectives set out in the FSMA.
The conditions have been designed to give the market confidence that regulatory and voluntary options have been explored before a bank is put into the SRR. Given that, to impose a different set of objectives over and above the principles and objectives that guide the FSAs decisions under the FSMA would provide confusing and possibly conflicting guidance to the FSA in exercising its discretion. There is clearly a distinction to be made between the actions taken under the SRR and whether the SRR should apply, which will depend on the conditions being met and the FSAs exercising its decision-making power in accordance with the rules and guidance in the threshold conditions in its handbook.
For those reasons, I hope that the hon. Member for Fareham will feel able to withdraw his amendment. He raised an interesting point about whether the FSA would pull the trigger if the Bank did not want to act. As I have explained on a number of occasions, the decision to pull the trigger is taken by the FSA, but it will be taken after close consultation with the Bank of England and the Treasury. As various consultations have made clear, it is not a linear process. Very few things in real life are; I think that Einstein said that even a straight line was not necessarily linear. Authorities would consult each other on all decisions, as is set out in the Bill. In practice, the intention would be that the decisions would all be taken and announced together.

Sally Keeble: The clause goes to the heart of some of the problems that we saw in the Northern Rock debacle. My hon. Friend has described how he thinks the procedure will work in practice. How much scenario planningwar games or whateverhas there been or will there be to test how the procedures would work in practice?

Ian Pearson: We can probably say that the relationship between the Bank of England, the FSA and the Treasury has been forged in battle over recent months. Extensive and close consultations have been held. I do not think that circumstances could arise in which the FSA would pull the trigger without knowing what the Bank or the Treasury was going to do. There is close co-operation, and I do not doubt that it will continue.

Sally Keeble: The issue about the working of the tripartite authorities is critical, and Opposition Members and some Labour Members have been critical of it. The mechanism was supposed to resolve some of the difficulties that arose last time. Will the Minister be clearer and say exactly what steps have been taken to check or work through how the mechanisms would resolve some of the current difficulties, and how they would operate in practice?

Ian Pearson: As my hon. Friend knows, we have consulted widely on the Bill. We have talked extensively to the Bank of England and the FSA, so it is not as if there has not been an enormous amount of discussion on how the tripartite authorities will work together. There is consensus on the legislation that it is an appropriate way forward. In the evidence-taking sessions that we had at the beginning of the Committee, there was widespread acceptance, when the FSA and the Bank of England were asked questions by members of the Committee, that this was a workable and sensible way forward. We are following that in the Bill.

Mark Hoban: I think that the hon. Member for Northampton, North is alluding to the lack of clarity. The Bill is actually quite straightforward in that it offers the possibility of pulling the trigger and deciding on the stabilisation options. In that respect, there is a clear legal process. However, the implementation of the measure is more sophisticated, because there will be a debate or dialogue between the tripartite authorities about the problem bank. There could be a situation in which the Bank and the Treasury decide that they cannot use the stabilisation powers because they do not think it appropriate. Their conclusions will inform a decision by the FSA to pull the trigger. Effectively, they will have a veto over the trigger, but the Bill suggests that they would not have such a veto. There is a tension between the practical ways in which the powers will be exercised and the legal form. Actually, the practical implementation gives rise to some of the uncertainty and concerns that people have about how the tripartite authorities operate, particularly in the context of a situation such as Northern Rock.

Ian Pearson: I agree with the hon. Gentleman that a clear and sophisticated approach is being adopted to the legislation. Of course, the authorities will work extremely closely together on these matters. As we all appreciate, we are talking about exceptional circumstances. We have experienced such circumstances, and we have the examples of Northern Rock and Bradford & Bingley. We have learned lessons from those and the legislation that we have designed would have been appropriate in those circumstances. It will put a permanent regime in place that gives confidence to the financial markets that there is clarity in our approach. At the same time, our approach recognises that we cannot put the minutiae of future discussions between the three organisations in the Bill.

Peter Viggers: The Minister is seeking to reassure us about the procedures for consultation in relation to the pulling of the triggerI should certainly like to be reassured on that. The procedure will work only if the Bank is sufficiently tasked and staffed so that it is capable of staying close enough to the situation for the consultation to be worth while. It is no good for the FSA to have the staff or monitoring capacity if the Bank is slightly divorced because it is unable to participate through a lack of resources. Will the Minister reassure us that the Bank will be resourced sufficiently to remain close enough to the situation to be worth consulting over such matters?

Ian Pearson: I agree that the Bank of England needs to be resourced to perform the tasks required of it, particularly the responsibility for financial stability under the powers given to it in the Bill. That is right and proper.
As a final word on the matter, because we are treading on the ground of a stand part debate, I want to make it clear that we are not designing a zero-failure regime. There might well be circumstanceswho is to say?in which the Bank or Treasury decide not to use a stabilisation power where the threshold conditions have been triggered. In those circumstances, the bank might go into a normal insolvency, but it might also go into the bank insolvency procedure detailed in the Bill to ensure fast payout through the Financial Services Compensation Scheme. It is not a zero-failure regime, but we believe that the lead responsibilities among the different parts of the tripartite arrangement that makes up the authorities are the right lead responsibilities. Of course they will work together closely. That is the normal and expected way of things.

Mark Hoban: One suggestion made in the context of the code was the need for a decision tree to set out the various steps of the process in order to enable users to understand what happens when and in what circumstances.

Ian Pearson: A non-linear decision tree?

Mark Hoban: Indeed, that is part of the problem. I tabled my amendment to delete subsection (6) because I interpreted the clause to mean that the general conditions would be exercised very differently from the powers exercised by the FSA under the Financial Services and Markets Act. However, the Minister says that there is a boundary or demarcation line, and that the FSA will consider the threshold conditions in the context of the FSMA and its rulebook. That will be one part of the boundary, and then it will flip over into the powers granted by the Bill to the Bank and the Treasury.
However, that demarcation line does not actually exist. There is no clear line. It is more of an iterative process among the tripartite authoritiesI do not think that one can have a circular decision treethat will affect how the FSA exercises its powers under the FSMA and how the powers in the Bill will work. We are trying through a legal process to impose clarity where clarity does not necessarily exist, and part of the challenge is reassuring people about how the powers will be exercised when that degree of clarity is lacking.
That is part of the Governments challenge in communicating how the Bill will work in practice. The explanatory notes do not make the process clear, so it is again up to our old friend the code to elaborate on that slightly circular process. We need to work a bit harder on explaining how the initial process will work in practice. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 ordered to stand part of the Bill.

Clause 8

Specific conditions: private sector purchaser and bridge bank

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I want to make a few brief remarks about clause 8 and to probe the public interest point that the Minister mentioned in our brief discussion on clause 7. The clause sets out the conditions that enable the Bank to use its share transfer or property transfer powers to transfer a bank to a bridge bank or a private sector purchaser. Condition A is that the exercise of the power is necessary having regard to
the stability of the financial system...the maintenance of public confidence in the stability of the banking system...or the protection of depositors.
Those three points relate back to the objectives of the special resolution regime in clause 4. I can understand why that is the case. What surprises me about those powersgiven the nature of the stabilisation, the share transfer and the property transfer powersis that they do not have regard to objective 5 in clause 4 (8), which is
to avoid interfering with property rights in contravention of a Convention right.
If we are talking about the Bank exercising the stabilisation powers, then it would have to consider objective 5. Will the Minister expand a little on that?

Peter Bone: We are now returning to an earlier argument that we had in which we said that the Government have some super-objectives, and that all the objectives listed in clause 4 do not balance each other. Now we have this clause, which states only three of the objectives rather than the five. Therefore the Government have, in effect, three super-objectives. I do not understand why the Government will not admit to that.

Mark Hoban: My hon. Friend makes an important point. We debated the priority of the objectives, and we were told that there was no priority. However, we have a situation in which one of the objectives, which is relevant to the powers the Bank can exercise under clause 8, has been excluded. We must consider whether objective 5 in clause 4 has any value both in the Bill and in the context of the share and public transfer rights.
Condition B is phrased rather differently. It comes into play when the Treasury notifies the Bank that
they have provided financial assistance in respect of a bank.
Again, we have debated this matter. We have considered what financial assistance means and what types of financial assistance can trigger the special resolution regime. We know that the Government will come forward with secondary legislation on that. Again, we have a situation in which the objectives that condition B relates to are much more limited. Subsection (5) (a) says that
the Treasury have recommended the Bank of England to exercise the stabilisation power on the grounds that it is necessary to protect the public interest.
It is not clear whether that is the same public interest that is referred to in subsection (2), which is effectively in the first three options. Subsection (4), however, refers to the financial stability objective. The Treasury, through condition B, recommended that the Bank should exercise its stabilisation powers, but there is no reference to objective 5, which is about property rights. Given that those rights effectively effect a partial transfer, why is objective 5 not listed there? Concerns have been expressed about the impact of such powers on creditor rights. Therefore, it is surprising that objective 5 has not been included in clause 8.
Condition B can be satisfied only if
the Treasury have recommended the Bank of England to exercise the stabilisation power
and if it is the Banks opinion that that is the best way to proceed. Will we ever know whether the Bank has turned down the Treasurys request? Would the Bank ever turn down the Treasurys request or is it one of those areas where we are back to the non-linear decision tree in which there is a general discussion and all the steps are announced at the same time?
I wonder whether the Minister will take the opportunity to explain which definition of financial stability applies in the clause. We have the broad definition in the code and the one set out in the evidence given to us at the start of Committee by Nigel Jenkinson of the Bank of England and provided in evidence to the Treasury Committee. The Banks working definition, supplied to us in the evidence session, is narrower than the definition in the code. I raised that with the Minister on Tuesday, but the question did not get a reply. It will be helpful to understand how the tripartite authorities will reconcile the two definitions of financial stability.
Returning to this slightly non-linear process, I think that clause 8 is subordinate to clause 7, whereas the language in clause 8(6) suggests that it is in addition to it and that the two work together. The provisions in clause 8 can be exercised only if a decision under clause 7 has been reached, but the language in clause 8 does not reflect that.

Ian Pearson: The authorities recognise that the stabilisation powers can alter or remove property rights and involve public authorities taking control of commercial institutions. Therefore, the special resolution regime stabilisation powers should be used only when they are justified in the public interest. To that end, in addition to the general conditions provided in clause 7, the Bill requires further specific conditions to be met before the authorities can deploy particular SRR stabilisation options, and those are set out in clause 8. The clause requires the Bank of England to be satisfied that specific conditions have been met before exercising a stabilisation power to transfer the whole or part of a failing bank to a private sector purchaser or a bridge bank. I draw the attention of the Committee to the structure of the conditions, which require that one of two specific conditions be met before the Bank can act.
Condition A ensures that, before the Bank of England can exercise the powers to transfer a bank to a private sector third party or a bridge bank, it needs to be satisfied that exercising the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, in the maintenance of public confidence in the stability of the banking systems and in the protection of depositors. Those specific conditions provide a higher test than a public interest test framed in wholly general terms. Effectively, they set out in the Bill those elements of the SRR objectives, which the hon. Member for Fareham noted we discussed under clause 4, to which the Bank of England must have regard before deploying its resolution tools. Before determining that the conditions are met, the Bank of England must consult with both the Treasury and the FSA.

Peter Bone: Will the hon. Gentleman give way?

Ian Pearson: May I reply to the points raised by the hon. Member for Fareham? I will then happily give way. The hon. Member for Fareham asked why the specific conditions cover all the SRR objectives, but ignore the SRR objective of protecting property rights. The aim of the stabilisation tools is to protect depositors and to maintain financial stability and confidence in the banking system, or to protect public funds if they have been invested in the bank before the SRR powers were exercised. The authorities must have regard to the objective of protecting property rights when exercising the tools, so it is not appropriate for it to be a public interest test that justifies using the tools.

Peter Bone: Towards the end of his speech the Minister said, the stability of the financial systems of the UK...and the protection of depositors. It says in the Bill or. If it is and, all the conditions will have to be met; if it is or, only the protection of depositors. I wonder which it isthe collection of the three or the single one. If it is as it says in the Bill, not as the Minister said, it could be just the protection of depositors, irrespective of the other two conditions.

Ian Pearson: My understanding is that it could specifically refer just to the protection of depositors. It could refer to all three of them but singly would be possible.
Condition B in clause 8 applies to the situation where the Treasury has provided financial assistance to a failing bank
for the purpose of resolving or reducing a serious threat to the stability of the financial systems.
In such situations, to protect public funds, the Bill requires the Treasury to lead in judging that a stabilisation power is necessary to protect the public interest but the Bank of England will still lead in deciding that an exercise of a stabilisation tool best protects that public interest. This arrangement ensures that both authorities exercise powers under their mandates.
The hon. Member for Fareham also asked about definitions of financial stability. One definition of financial stability relates specifically to the Banks exercise of its powers under the SRR. There is also a wider definition of financial stability. That explains why there are different definitions. It might be helpful if I write to the Committee and explain the difference and the reasons for it.
This is an important clause that ensures that the stabilisation tools are used only when it is necessary to protect financial stability, confidence in the banking system or depositors.

Mark Hoban: I am grateful to the Minister for his reply, which reinforced the intervention about the hierarchy of objectives made by my hon. Friend the Member for Wellingborough during my earlier remarks. It appears that the principal objective is the protection of depositors. Whenever we debate what the Bill seeks to achieve it appears that the interests of investors and creditors rank pretty low down the list of priorities. That is reinforced by this clause, which enables the Bank to disrupt traditional property rights because it gives the Bank the power eventually to have partial transfers. The message that comes through clearly is the relatively low priority given to the rights of creditors. That goes back to the concern people have about this Billthat the power given by the Bill to the tripartite authorities is not well constrained when it comes to the interests of people other than depositors. The Government need to think carefully about how that protection of creditors is expressed or givenwe will come on to that again in clauses 42 and 43. I do not get the impression at the moment that creditors are given a particularly high priority. That is why I would expect to see the Government take the interests of creditors more seriously. The Bank could have had regard in clause 8 to objective 5 in the same way as it has regard to the other objectives. There is a gap that the Government need to address.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 9

Specific conditions: temporary public ownership

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I shall not go over the ground that I covered under clause 8, but the same sorts of concerns arise. There are two examples of temporary public ownership that we can refer to. One is the way that the Government dealt with Northern Rock, which is still in temporary public ownership and will be for some time. The other is the rescue of Bradford & Bingley, which, as I understand it, involved that institution going into temporary public ownership to enable deposits to be transferred and some of its residual activities to be acquired by Abbey Santander.
What guidance does the Minister have for the Committee on how long an institution will be allowed to be in temporary public ownership? The example of Bradford & Bingley would suggest a relatively short timeit was a very temporary measurewhereas Northern Rock could be with us as the peoples bank for some time. Temporary is an elastic term, but it would be helpful to know where temporary public ownership fits in the stabilisation options hierarchy, alongside private sector purchasers and bridge banks.

Ian Pearson: As we debated under the previous clause, the stabilisation powers can alter or remove property rights, and they involve public authorities taking control of commercial institutions. Therefore they should be used only when they are justified in the public interest. I wish to take issue with the hon. Gentleman. He said that we are not taking the interests of creditors sufficiently into account; clause 8 provides a higher-level test with regard to the public interest, which is why we included it.
Whereas clause 8 deals with the specific conditions for transferring a failing bank to a private sector purchaser or a bridge bank, this clause provides specific conditions that must be met before the Treasury can take a bank into temporary public ownership. Those conditions are that the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the UKs financial systems, or that it is necessary to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to the stability of the UK's financial systems.
The specific conditions in clause 9 are in addition to the general ones in clause 7, and are the same as those in the Banking (Special Provisions) Act 2008. Hon. Members will note that they therefore provide a higher test than those in clause 8. They signal that the power for the Treasury to take a bank into temporary public ownership is a last-resort SRR tool, and reflect the situations in which doing so may be the most appropriate option. Examples of those situations are: where the Treasury has provided a failing bank with a significant amount of public money to stabilise it; where wholesale and long-term restructuring is required to return the bank to the private sector; and where the bank is subject to an extremely fast-burn or complex failure such that there is insufficient time or means to effect a property or share transfer to a private sector purchaser without significant risk. The clause provides a strict test, and makes it clear that temporary public ownership is a last resort.
The hon. Gentleman asked how temporary temporary is. It would not be sensible to put a time limit in the Bill. The Government would not intend the option to be a long-term one, reflecting how the word is normally interpreted. We try to make it clear in clause 9 that we consider temporary public ownership only if it is appropriate. It is certainly a last-resort option. We would always want in the first instance to prevent a bank from entering the SRR. If it was necessary to do so we would look at the private sector purchase route. We would look to use the bridge bank tool. The temporary public ownership tool should be seen very much as one of last resort.

Mark Hoban: I am grateful for that clarification. It is very much one of last resort, but I am not sure how clause 9 demonstrates that. It does not say that if we are unable to achieve the options set out in clause 8 we can move into temporary public ownership. Clause 12 talks about the third stabilisation option. I am not sure whether that means that it is the third preference, so I am not sure where this proof that it is a last resort appears in legislation.

Ian Pearson: The higher tests for temporary public ownership than for a bridge bank or transfer to a private sector purchaser clearly demonstrate the Governments intention. We believe that taking ownership of the whole of a bank must be justified only on the basis of a higher public interest test that reflects the specific reasons why such action will be taken. We think it important that this is an option to address financial stability risks, including when financial assistance has already been provided, as I have explained. It is important to have the ability to protect taxpayers interests by taking full control of a failing bank. I am happy to repeat that the higher test levels and the fact that the authorities would always want to look for another solution first, very much reflect the way in which we have designed the Bill overall.

Peter Bone: I understand that the Minister is stating the Governments position, which is that if circumstances necessitate it, partial public ownership will be the last resort. That is their intention. But it does not bind any future Government to that. The next Government may be very keen on nationalising things. That is very unlikely, but the Bill does not rank it. The Minister is stating the current Governments position if such an event occurred.

Ian Pearson: It is certainly this Governments position. But I refer the hon. Gentleman to some of the detail of the clause. It makes it clear that a high level of test needs to be satisfied before action can be taken in this area. There would have to be a systemic threat to financial stability. There would have to be some significant Government investment in the failing bank already. A medium-sized bank that got into financial difficulty and which the Government had not supported previously could not suddenly be nationalised. That is not the Governments intention. Clause 9, as I understand its construction, would not allow that to happen. We are trying to make the Governments position in this area as clear as possible. That is why I have indicated very strongly that this is seen as an option of last resort which might be needed in certain circumstances.

John Pugh: Just to be absolutely clear, and I think I understand the logic of the position, the Minister is saying that the Government wish to keep open the possibility of temporary public ownership, even if the option of private sector purchaser and bridge bank is also open at the same time. In other words, it could be a tool of preference. That is clearly what the legislation says at the moment. Even though the preference would normally be to use it as a last resort, it would not inevitably be used as one, and it could be used in circumstances where there was still a private sector purchaser in the wings or the possibility of a bridge bank.

Ian Pearson: As I was trying to explain, the higher public interest test means that it could be used only when financial assistance had been provided or there was a systemic threat. It could not just be generally used. If either of those conditions were met, it would be a matter for the Treasury, in discussions with the Bank of England, which will take the lead responsibility in exercising stabilisation tools, to come to some agreement about the best way forward. I used the term last resort because it announces the Governments intention clearly, but it would not be appropriate to put that in the Bill. It could certainly be an appropriate course of action depending on the circumstances, but as I have outlined, the higher-level tests provide a significant assurance about how the power might be used in future.

Mark Hoban: I am still not entirely clear that the clause includes a higher public interest test. It provides a public interest test where financial assistance has been provided, but financial assistance is also one of the precursors to condition B in clause 8. It is not clear where the crossover point is between condition B and the higher tests in clause 9. The Minister may say that the language in subsection (2) about a serious threat beefs up the provisions beyond clause 8. That might be his justification that the test in clause 9 is a higher test, but I am not sure that that is what he is saying. We have not heard clearly on the record what specifically about the wording of clause 9 makes it a higher test than clause 8 and a power to be used only in the last resort.

Peter Bone: On the principle behind the clause, I understand entirely the Governments position that Government ownership of a bank is the last resort, but that is not what the Bill says. Under the Bill, even though a private market opportunity might be available, the Government could decide that nationalisation, even temporary nationalisation, was more in the public interest.
If that is what the Government meanif they want to leave it open for a Government to decide that nationalisation is an option although there is a market solutionthat is fine. However, that is moving a long, long way from the position at the start of the crisis, when the Chancellor was almost apologetic about nationalising Northern Rock, saying that it was the last thing and that we could not find any other market solution. We may have to come back to this on Report, but I ask the Minister: what are the Government really saying? Are they saying that in all cases, they want a market solution if possible?

Mark Todd: There is one conceivable circumstance in which pursuing an available market solution might not be regarded as appropriate or in the public interest. We have seen an illustration of that in the dilemma involved in the permissive approach to the merger of Lloyds TSB and HBOS. A judgment might be made that that was such an uncompetitive move in the marketplace that it was not in the public interest to pursue it, even though it could be conceived as a solution to that particular banking crisis. That is an illustration of why the tools might be used slightly differently.

It being twenty-five minutes past Ten oclock, The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One oclock.